UK faces £31 billion budget shortfall

Slow economic growth and high inflation could lead to Britain’s tax receipts being £31 billion lower than expected by the end of the decade, a think tank warned Tuesday.

Unexpected increased borrowing would also lead to a budget deficit of £14.9 billion in 2019-2020, the Institute for Fiscal Studies (IFS) stated in a report published ahead of British Chancellor Philip Hammond’s November 23 Autumn Statement.

Former Chancellor George Osborne had targeted a £10.4 billion surplus.

The IFS study was paid for by the government-funded Economic and Social Research Council.

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John Corfield

I thought it was a deficit of £88 billion banded around by another “Project Fear” think tank 2 weeks ago.
So these figures are splendidly lower .

Posted on 11/8/16 | 9:15 AM CET

Carlton Brown

Perhaps a flat-rate UK tax on all corporate profits might bridge the gap. Tax avoidance schemes used in Ireland have reduced UK tax revenues from companies. The EU fined APPLE and EDF for such practices. Governments no longer in control….so it would seem?

Posted on 11/8/16 | 9:18 AM CET

Maverick

Hmm lets put this into perspective.

For 2015/16 the deficit was £69 billion.

In March 2016. If the Chancellor had done nothing in his Budget today, the £10 billion surplus he was aiming for in 2019-20 in November would have become a £3 billion deficit. And that is on the basis of applying a severely austere budget resulting in restricted growth of GDP of 2.4%

Pre referendum “Osborne warned ahead of the vote that an emergency budget would be needed to fill a “black hole” of about £30 billion ($42.6 billion) per year if the U.K. left the EU”. So by the end of the decade that would be a deficit of an additional £120 billion.

Posted on 11/8/16 | 1:42 PM CET

Jodocus

Scanned the report. Glum reading for the UK.

The first thing to note is increased uncertainty as the terms of Brexit aren’t known yet, but growth forecasts have been adjusted downwards and budget deficit forecasts have been adjusted upwards.

The report states:

“If economic performance turns out differently than we
assume, the public finances could look much better or
worse. Past public finance forecast errors imply the
chancellor still has a 40% chance of a surplus in 2019–20.
But, on the flipside, there is also a 40% chance that the
surplus in 2019–20 turns out to be more than £30 billion.”

The much vaunted 8 bln. GBP annual EU contribution can’t be booked as a plus because Britain will want to compensate various groups and entities that now receive EU subsidies (e.g. farmers and researchers).

From the report:

“In the medium to longer term, the effects of leaving the EU will depend on the UK’s future
relationship with the EU and the rest of the world. Drawing on (in particular) the analysis
of CEP, HM Treasury and NIESR, Emmerson et al (2016, op cit) identify four areas in which
the UK leaving the EU might affect the UK economy. The first and most important is trade
costs. The EU is the UK’s largest trading partner, accounting for 44% of exports and 53% of
imports in 2015. Leaving the EU is likely to mean increased barriers to trade with the EU,
Changes to the macroeconomic outlook since March possibly including tariffs on goods, but also an increase in non-tariff barriers, which are
increasingly important – especially for trade in services. 9 Barriers to trade with non-EU
countries would also change if the UK exits the EU and negotiates new trade deals rather
than being covered by EU agreements. Among pre-referendum forecasters of the
economic impact of leaving the EU, there was broad agreement that, in the longer term,
effects on trade are likely to be quantitatively most important in considering the effects on
economic performance. In most estimates, in most possible states of the world, these
effects were projected to be negative as costs of trade increase. The effects were bigger in
scenarios in which the UK does not rejoin the European Economic Area (EEA) and biggest
if it cannot agree a trade deal with the EU.”

In other words: expect an adverse impact due to increased cost of trade with the EU. Note that “services” are mentioned explicitly, I think they mean passporting rights. The report is noncommittal about trade relationships with the rest of the world, but clearly doesn’t adopt the optimism held by Brexiteers.

“The other effects identified were potential changes to regulation and migration. It is
possible that leaving the EU would allow a reduction in financially costly regulation,
though quite how much appetite there would be for deregulation is uncertain. We start
with an economy that is relatively lightly regulated by international standards and we
know that recent governments have chosen more, not less, regulation in key areas over
which we do have control.”

In plain language: the much-hyped savings from scrapping Brussels “bendy bananas” rules are unlikely to materialise.

” The impact of Brexit on migration is uncertain. Reducing
immigration would reduce national income and if it were to have an effect on national
income per capita it would more likely reduce it than increase it, though that would
depend on the exact nature of policies put in place.”

In other words: the issue people got so agitated about, immigration, is unlikely to have a major economic impact.

All in all, as I read it, from an economic point of view Brexit seems counterproductive and irrelevant as far as the economic impact of immigration is concerned.

Posted on 11/8/16 | 2:10 PM CET

Maverick

@Jodocus

So basically what the report and what you are stating is that it means no one has a clue what will happen as there are too many uncertainties and variables. An accurate assessment.

Posted on 11/8/16 | 3:00 PM CET

Maverick

@ Jodocus

As you state and as per the report there are too many variables & uncertainties that basically nobody has any clear idea of what will happen. There are simply too many assumptions, and at best it’s only usefulness is in indicating potential risk areas that may need to be addressed/mitigated.

However of course we must realise the IFS whilst arguably politically independent has its flaws in so far as its aim and foundation is based on the principle to change British fiscal strategy, with a bias “to alter the climate of opinion within which changes to the British tax system & alter the procedures by which changes in the tax system were effected with a view to create a more rational tax system

It is not without its critics such as;

“that the institute holds an excessive faith in the power of market forces”

“the IFS was ’embedded in all the normal, standard pro-market assumptions that dominate conventional economic thinking in the UK and elsewhere'”

” the IFS of using methods that were “distorted and a complete nonsense”[14] after it challenged government claims that tax and benefit reforms in the June 2010 Budget were “progressive”

“Institute for Fiscal Studies is a body that persistently recommends tax increases that benefit the wealthiest in society at cost to those who make their living from work and the poorest in society”

“institutes’ funded by research grants (which means, usually, tax money) will always argue for more expensive meddling by the state” and that the Institute for Fiscal Studies was “the most striking example” of this”